Facebook IPO: Social Hype or Sound Investment

As early as tomorrow, Facebook is expected to file paperwork for an initial public offering (IPO). The social media giant is reportedly hoping to raise $10 billion on a valuation of $100 billion.

According to many experts, Facebook’s revenue, which eMarketer estimates was approximately $4.4 billion last year, is not high enough to warrant a $100 billion valuation. Kathleen Smith, the principal at Renaissance Capital, said the following regarding the IPO:

“Facebook’s expected valuation of as much as $100 billion, or about 20 times revenue, is high. You have to believe that revenue growth is 50% to 100% over the next couple years to justify that.”

In addition to the high valuation relative to earnings, business analysts say that a diversification of revenue and income sources would increase the company’s appeal to investors. For example, expanding the Facebook Credits, which is currently about 10% of Facebook’s revenues, and introducing similar programs would diversify income sources and reduce overall investment risk.

Although critics are quick to name many reasons that Facebook is not worth $100 billion, a compelling argument can be made for investing in the social media giant. Facebook, which has over 800 million users, is expected to reach 1 billion users in August. To put this number in perspective, Google just reached one billion users last year. With the average U.S. Facebook user spending seven hours and 45 minutes per month compared to only two hours on Google, it is easy to see that the Facebook experience is an important part of its users’ everyday life.

If Facebook is able to raise $10 billion on a $100 billion valuation, its IPO would be more than six times Google’s IPO of $1.66 billion and Facebook would immediately have a market capitalization greater than Walt Disney Co. or General Motors. With recent technology IPOs from LinkedIn, Pandora, Zynga, and Groupon not performing as well as expected, investors will be closely watching Facebook’s stock debut.

At the time of publication, Facebook was trading on SharesPost at $35.50 per share which equates to a market value of $83.5 billion.